Taps Coogan – September 27th, 2022

The word ‘depression’ got thrown around a lot in April and May of 2020. At the time, we pushed back against the depression calls and the ubiquitous ‘L’ shaped recovery forecasts, warning instead that excessive stimulus would end up being the more enduring problem. We noted:

“Part of what makes severe recessions and depressions drag on for as long as they do is their lack a clear terminus… The current economic recession, however, has an exogenous cause and, at least theoretically, a logical terminus. Regardless of what happens with the Coronavirus pandemic, the economic shutdowns will not last forever.”

I seldom hear the word depression from mainstream analysts today despite much more intractable problems than in 2020.  

To the contrary, we have been subjected to an esoteric-albeit-technically-true diatribe about how we are not in an official recession. The ‘real’ debate these days is whether we’ll have a recession in 2023, with great emphasis being placed on the presumed discontinuity between today’s negative real GDP growth and the recession that most forecast say we’ll be entering in a few quarters.

Whereas the pandemic/lockdown recession of 2020 was obviously exogenous, today’s ‘not-recession’ is not. True, part of the crisis is the settling-out of a global economy shaken up by the events of the last couple years, but in a more complete sense, it is the collision of those shorter term factors with an intractable energy crisis, excessive indebtedness, a historic stock bubble, and a war in Ukraine with no clear end. All of those factors are in turn colliding with the peaking of the US working age population.  

As we have argued repeatedly, a severe recession need not happen. A pause on tightening could allow for a mild-to-moderate recession and an extended period of falling but higher-than-desired inflation which provides the economy time for more-or-less ‘controlled’ deleveraging. 

However, continuing to aggressively hike interest rates faster than their effects can be assessed, while simultaneously doing record amounts of quantitative tightening against the backdrop of negative real GDP, historically negative consumer sentiment, yield curve inversions, and so on, is how one would provoke a 100-year storm if it were their intent. 

Therein lies the problem for the economy and markets. While markets may be getting oversold on a short term basis, beyond talk of bear market rallies the outlook is bracketed between years of purgatory or something much worse. This time the crisis is structural.